3. You are a sales manager at a company. You want to hire a new sales...

 

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3. You are a sales manager at a company. You want to hire a new sales representative. You plan to make an offer to someone (Sally). You can pay her a fixes salary of $20 000 per year or a 10% sales commission plus a fixed amount a. She has a competing offer at another company of $20 000. You anticipate hiring her if you can meet the $20 000 fixed salary offer. Sally's sales can either be high or low depending on whether she gets a corporate account. If she gets the account, sales will be $100 000> If she does not sales will be $10 000> The probability of getting an account is .7. This probability is beyond Sally's control. Sally's utility function is U=(compensation)0.5. She seeks to maximise expected utility. a. Sketch the graph of the function u(x) = x0.5. b. Is Sally's utility function convex, concave or linear? Is she risk averse/neutral/loving? c. What a makes her indifferent between the two plans? d. As the sales manager, which plan do you select? Given an explanation why this is optimal. 4. You are an employer and cannot observe the effort level of your risk-neutral employee. Design an incentive contract to motivate the employee. 5. In 1995, Philip Morris Company ratified a new labour pact that gave employees stock in lieu of pay increases. The agreement covered 7800 employees, with each employee receiving 94 shares (valued in 1994 at $60 a share). Employees cannot sell the stock for at lease a year and forfeit the stock if they quit or are fired before the year expires. It wa argued in the business press that the deal was good for Philip Morris because the employees' base pay and fringe benefits did not rise. Also, it was argued that current shareholders shares won't be diluted as employees will get less than 500 000 shares out of 850 million outstanding. Discuss the pros and cons of this policy compared with a policy of simply giving a cash bonus to employees of a similar value. 6. Some companies reward salespeople based on their performance relative to other salespeople in the firm. Why would a company want to do this? 3. You are a sales manager at a company. You want to hire a new sales representative. You plan to make an offer to someone (Sally). You can pay her a fixes salary of $20 000 per year or a 10% sales commission plus a fixed amount a. She has a competing offer at another company of $20 000. You anticipate hiring her if you can meet the $20 000 fixed salary offer. Sally's sales can either be high or low depending on whether she gets a corporate account. If she gets the account, sales will be $100 000> If she does not sales will be $10 000> The probability of getting an account is .7. This probability is beyond Sally's control. Sally's utility function is U=(compensation)0.5. She seeks to maximise expected utility. a. Sketch the graph of the function u(x) = x0.5. b. Is Sally's utility function convex, concave or linear? Is she risk averse/neutral/loving? c. What a makes her indifferent between the two plans? d. As the sales manager, which plan do you select? Given an explanation why this is optimal. 4. You are an employer and cannot observe the effort level of your risk-neutral employee. Design an incentive contract to motivate the employee. 5. In 1995, Philip Morris Company ratified a new labour pact that gave employees stock in lieu of pay increases. The agreement covered 7800 employees, with each employee receiving 94 shares (valued in 1994 at $60 a share). Employees cannot sell the stock for at lease a year and forfeit the stock if they quit or are fired before the year expires. It wa argued in the business press that the deal was good for Philip Morris because the employees' base pay and fringe benefits did not rise. Also, it was argued that current shareholders shares won't be diluted as employees will get less than 500 000 shares out of 850 million outstanding. Discuss the pros and cons of this policy compared with a policy of simply giving a cash bonus to employees of a similar value. 6. Some companies reward salespeople based on their performance relative to other salespeople in the firm. Why would a company want to do this?

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1 Graph of the function ux x05 The graph of the function ux x05 is a concave function that starts at the origin and increases at a decreasing rate as x increases Graph of uxx05httpsiimgurcomzG8z5nMpng ... View the full answer